In the 1930’s, Ralph Nelson Elliott found that the stock market prices moved in recognizable patterns. These patterns, or groups had five variations and were repetitive in form, but not always in time or amplitude. He described how the Elliott groups link together to form the same patterns as the next larger size (fractal), and so on and so on. This structured progression occurrence is The Elliott Wave rule. It can be used to predict both market direction and market timing according to it’s proponents. In 1960, A. J. Frost became a partner of the late Hamilton Bolton, who introduced him to the Elliott Wave rule. After Bolton’s death in 1967, Frost wrote two Elliott Wave Supplements. In 1977 he delivered a speech on Elliott and met Mr. Prechter. Robert Prechter co-authored with A. J. Frost C.F.A., to write the book, ELLIOTT WAVE rule – meaningful TO MARKET BEHAVIOR in 1978.
The Elliott Wave rule can be a good forecasting tool as it is a detailed map of how markets behave from looking back and then extrapolating what direction they may go in the future at degrees of extent. Since the stock market in total is such a big compilation of human work, production and endeavor; it follows nicely along the wave rule patterns. Prechter has found that markets already in very short time periods can go by an Elliot Wave ordern.
If the market is in a major long term trend, the Elliott Wave is a motive or impulse of five definite price movements leading to a climax or blow off top or bottoming crash with periods of smaller three wave A-B-C retracing part of the 5 wave impulse up. In bear markets the Elliott Wave is a corrective wave or Zigzag of three large A-B-C price movements down to a bottom or crash with periods of smaller five wave retracings pointing down. This is what the wave structure is doing right now! According to Robert Prechter, this proves we are in a secular long term bear market.
Amazingly, that is exactly what is going on right now. The market is in retreat and the groups down have been in fives since the year 2000 top! It is undeniable evidence we are in a secular bear market. This bear market’s large degree of extent is evidence we are in the Elliot Wave rule as a Grand Super Cycle decline three times as large and long as the 1930’s great depression. So, we are ten years into the Greater Depression. It is due to bottom out in 2016-2018. In fact, the stock indexes are showing a 10 year head and shoulders topping formation with a bearish down trending neckline. A neckline is the line drawn on the graph connecting bottoms of intermediate moves.
The Elliott Wave A complete cycle is eight groups made up of two definite phases.
1. The five-wave motive phase (also called a “five”), whose sub-groups are numbers.
2. The three-wave corrective phase (also called a “three”), whose sub-groups are denoted by letters. These groups can compound into patterns of one degree larger but the form is continued. Then the next eight-groups (5 capricious and then 3 reactionary) compound into patterns one degree larger, and so on. Building bigger and bigger(fractal). in spite of of degree, the form is continued.
R. N. Elliott had three consistent Elliot Wave rule rules of the five-wave form.
1. Wave 2 never moves beyond the start of wave 1.
2. Wave 3 is never the shortest wave.
3. Wave 4 never enters the price territory of wave
1. FRACTICALITY, FIVES AND FIBONACCI
Fibonacci (c. 1170-c. 1250) was an Italian mathematician who’s number ordern is the sum of the past two numbers starting with 0 and 1. 0, 1, 1, 3, 5, 8, 13 and so on. Higher up in this ordern he closer of two consecutive “Fibonacci numbers” divided by each other will approach the golden ratio of.618: 1 – Phi.
When analysts talk about the.618 retrace level they are referring to Elliott Wave and Fibonacci number fractal studies and points where markets often make a turn. Important Elliott Wave Fibonacci turning points are.382 -.50 -.618(phi also known as the golden ration, golden number, golden average or golden sextant) – 1.382 – 1.50 – 1.682. Not enough character is given to these important numbers although awareness is growing in the investment and financial world. Especially, since this is where markets seem make a turn every time.
Robert Prechter has found many instances of Fibonacci and fractals along with the Elliot Wave rule in character and human relationships including:
1. Just about anything that data can be collected and shown in graphic form will show Elliott groups.
2. Spirals in seeds, hurricanes, sheep horns, snail shells the mathematics is Fibonacci number related..
3. Branches in trees, arteries, brain and lung construction. Phi allows more efficiency and robustness, according to Robert Prechter.
4 Stock, bond & commodity markets in short and long time frames Since man is a herd animal and the stock market is a compilation of the work and industry of a mankind in total, the charts of these financial instruments tend to show Elliott Wave Principles, fractals and Fibonacci in looking back and predicting future retracing and sustain levels.
5. 5 pointed star or a identify on a line all math involved is Fibonacci.
6. Social man – self organizing progress ruled by Fibonacci mathematics because it allows the greatest efficiency and robustness. Precter has tracked use of words such as deflation and found they fit the 5 wave impulse and 3 wave retracement Elliott parameters and tend to turn at Fibonacci points.
7. Arboration. Not just the branching angles larger to smaller as one travels out from the plants base, but how stems and leaves both rotate around the base of the stem or branch and spread to optimize the sunlight they receive.
8. Fractals – think broccoli – each small spear is a mirror image of the large bunch. Think tree -a branch is image of whole. Think coastline – edge of tide pool looks same as the whole coastline if looking down from airplane. 8. Evidence clear down to subatomic particle behavior. Particles bouncing off walls of container look like coiled ferns.
9. The limbic system in the brain relates to emotional feelings and guides behavior required for self-preservation and the preservation of the species. If early man did not get along with the clan he was thrown out of the cave to freeze to death or was stoned to death. Likewise, if he did not conform with and follow his clan he was likely to get eaten by wild animals, get kicked out of the cave or get left behind to starve to death.
So, now mankind invests the same way. Buying more and more as prices rise (evidence is the recent real estate top) and conversely being afraid to buy at price low points. Robert Prechter has also, more recently, found evidence in markets and in character of Elliott Wave rule, Fibonacci and fractals all working together. His new study of Socionomics combines sociology with economics and Elliott Wave, Fibonacci and fractals all together. Socionomics says society’s mood will swing form optimism to pessimism and then back again. We are in the pessimism phase now. The Greater Depression is already here. It started in 2000 with the dot com stock blow off top. Elliott Wave theory says this has been a 10 year topping formation and that this cycle may not hit bottom until 2016.